CVCA, other Canadian orgs pen letter to US over “onerous” investment law

Four Canadian organizations are urging the US Department of the Treasury to exempt Canadian businesses from a law that could stifle Canadian investments into US startups.

The Canadian Venture Capital Association (CVCA), BIOTECanada, the Canadian Chamber of Commerce, and Medtech Canada jointly submitted a letter to the Deputy Assistant Secretary for Investment Security, Thomas Feddo, to change the language of the Foreign Investment Risk Review Modernization Act (FIRRMA). FIRRMA, passed last summer, aimed to address growing national security concerns over foreign exploitation of certain investments.

The joint letter, obtained by BetaKit, states that the law classifies Canadian companies and firms that invest in American startups as foreign entities, meaning they are subject approval from the Committee on Foreign Investment in the United States (CFIUS).

“Given that Canada is a close U.S. ally and does not present national security challenges, we believe the U.S. government should consider adding an exemption for trusted and low-risk investors,” the letter reads. “We recommend an exemption process using the Country Specification provision in FIRRMA.”

In August 2018, CFIUS passed FIRMA to close gaps between the transactions that the committee was able to review, and those it was not able to review, which included transactions raising national security concerns. International law firm White & Case surmised that the key target of this legislation was China, as Chinese investment trends pointed to the potential national security concerns.

One of the trends included real estate acquisitions in sensitive areas, another included minority investments that might not be controlling, but that provide access to sensitive information technology of the target American business. Another trend included the increased use of Chinese joint ventures through which American technology is transferred, and finally, concerns that Chinese deals are being structured to avoid scrutiny from CFIUS.

The letter stated that the inclusion of non-controlling investments made by foreign entities into US businesses has had a “significant impact” on Canadian investment in the United States. The language proposed in the letter by the Canadian organizations would exempt countries from requiring CFIUS approval that have a mutual defence treaty with the United States, including countries part of the North Atlantic Treaty Organization (NATO), which would include Canada.

Several Canadian organizations have made similar proposals for new language in FIRRMA, including the US Chamber of Commerce, the National Venture Capital Association, the Biotechnology Innovation Organization American Investment Council, the Medical Device Manufacturers Association, and the Advanced Medical Technology Association.

One Canadian VC familiar with the circumstances prompting the recent letter told BetaKit Canadian organizations are worried that FIRRMA could be used as a tool during trade disputes between the United States and Canada.

“Our two countries are more than economic partners,” the letter stated. “We share a common heritage, a culture of democratic principles and a shared geography that make us allies in both business and national defence.”

“The changes that were made last summer have been on the CVCA’s radar from the moment that they were announced,” Kim Furlong, CEO of the CVCA, told BetaKit. “It was one of the first files that I was briefed on when I joined the CVCA. It has implications because we, as private capital, invest significantly in the US, and the bilateral trade and investment relationship amounts to about a trillion dollars annually. We’re part of that.”

“FIRRMA puts at risk the ability of Canadian VCs to syndicate with the US and US deals, because if there’s a delay, they could be excluded,” Furlong said.